It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong.Markets are designed to allow individuals to look after their private needs and to pursue profit. It's really a great invention and I wouldn't under-estimate the value of that, but they're not designed to take care of social needs.
George Soros

Tuesday, August 28, 2012

Don't Invest Your Money If You Want To Grow Rich (Do These Four Things Instead)

It's the ultimate catch-22. In order to become wealthy, traditional wisdom insists we invest our money. But for many, there's no money to invest. There are two paths to follow at this point. First, you could spend all of your time learning more about investing. Or second, you could do what Mark Ford suggests today. I suggest you listen to his wisdom.

Craig Ballantyne

"Follow effective action with quiet reflection. From the quiet reflection will come even more effective action." - Peter Drucker

By Mark Ford

In my ongoing effort to shock you with contrarian (and sometimes counterintuitive) truths about building wealth, I give you this little nugget to chew on today...

You cannot become wealthy by investing.

(Please keep this to yourself. If my colleagues in the investment advisory industry knew I said that, they would have me tarred and feathered!)

The investment advisory industry - and by that I include brokerages, private bankers, and insurance agents, as well as investment newspapers, magazines, newsletters, and Internet publications - is a huge, multibillion-dollar business based on hard work, clever thinking, and sophisticated algorithms. But also on one teensy-weensy lie.

The lie is that you can grow wealthy through investing.

It's not a big lie. It's a teensy-weensy lie. There is plenty of evidence that strategic investing can provide returns that exceed investment costs (brokerage fees, management fees, subscription fees, etc.) and even produce positive returns after inflation.

But for that, you need time. More time than you probably have.

Let's say you have $50,000 to invest. And let's say you invest it according to a really good investment strategy and things go well. Over a 10-year period, you earn an average of 10% per year. If you started on January 1, 2012, by December 31, 2021 your $50,000 would have increased to $129,687.

That's not bad. But it hardly makes you wealthy. So let's say you extend your investment horizon to 20 years. Beginning with the same $50,000, you would have $336,375 on December 31, 2031.

That's still not enough to make you rich! So let's say you extend your horizon to 30 years. By December 31, 2041, you would have $872,470.

That would give you $87,200 of yearly income. After taxes, you'd take home about $65,000 a year. That's OK, but it's hardly wealthy. And that's after investing for 30 years!

Most of the people reading the newsletter I recently launched, The Palm Beach Letter, don't have 30 years to wait. Based on what I know about our readership, I'd say our average reader has 10 to 15 years.

So what's a middle-aged (or older) wealth-seeker to do?

You can start by deconstructing that teensy-weensy lie.

Building wealth involves much more than just investing in stocks and bonds. Most rich people get that way by consistently doing five things:

They understand and manage their debt. They don't let debt manage them.

They spend their money wisely, getting maximum value for every dollar.

They continuously work to increase both their active and their passive incomes.

They are aggressive savers, far outpacing their peers.

They are disciplined investors. When they find a good strategy, they stick with it.

As you can see, investing is only one of five strategies you must follow to become rich. And of the five, it is arguably the least important.

Most of the rich guys I know spend little or no time investing.

Phil, for example, a very wealthy friend in his 40s, is an expert in municipal bond investing. But he didn't become wealthy by investing in bonds. He got wealthy as a marketing and Internet entrepreneur and by leveraging some debts and eliminating others. Nowadays, he buys and sells bonds - but he spends only a few hours a month on it. For Phil, investing is a part-time way to increase the value of his savings. It is not - and never has been - his primary road to wealth.

It's the same with all my millionaire friends. They all have their own investment preferences and practices. But like Phil, none of them spends more than a small portion of his working time on investing.

As for me, I paid almost no attention to investing until I started writing The Palm Beach Letter. And yet, I managed to go from broke to having a net worth in excess of $50 million - all without knowing the first thing about stocks or options or other sophisticated stock market strategies.

Don't get me wrong. I'm not saying investing has no value. On the contrary, I'm delighted to be an investor now, and I am certain that investing will continue to add to my wealth.

But I don't intend to spend 40 hours a week studying the market. What I will do is spend an hour a week following Tom Dyson and Paul Mampilly's advice. The rest of my wealth-building time will be devoted to increasing my income. And I have lots of ways to do that.

If you want to get wealthy in fewer than 30 years, you should do the same. Devote a couple of hours a week to managing your investments and spend the rest of your working time on the other four wealth-building strategies listed above.

I hope this message doesn't disappoint you. It's nice to imagine that you can get rich in 10 years or less by picking great stocks. But it's also a delusion. You may be thinking, "I don't need to be told to limit my spending or manage my debt. I already know how to do that." My response to that is: Do you?

Or perhaps you don't like my idea that you must - must - increase your income. Most people reading The Palm Beach Letter have been working hard for 30 or more years to raise families and put their children through school. They want to stop working for income. They want to invest and take it easy.

Giving up your active income is the single-biggest financial mistake you can make. Your active income is essential to building your wealth. If you want to retire some day and don't have at least $250,000 put aside for that purpose, you need more income now.

The good news is that there are all sorts of ways to increase your income. Just as there are all sorts of ways to manage your debt, get more value out of your spending, and ratchet up your savings.

You should pay as much attention to those strategies as you do the stock recommendations you receive